Continental Breakfast: U.K. Merger Mania Continues As Consolidation Gathers Pace

Consolidation within the U.K. legal market continues to gather pace. There were 21 mergers among the United Kingdom’s 100 largest firms by revenue in 2011, according to management consultancy Jomati’s MergerLine, and 13 more so far this year. And the rate appears to be quickening, with seven such deals among the group in the past two months and news of three more breaking in the past week alone.

In one of the three prospective mergers, a definitive agreement has already been reached. Last Friday, 230-partner insurance specialist DAC Beachcroft—itself the result of an October 2011 merger between Davies Arnold Cooper and Beachcroft—announced that it had secured a tie-up with Canadian insurance litigation firm McCague Borlack. DAC had already absorbed Scottish practice Andersons in March and plans by the end of the year to integrate financially with its two Chilean associate firms: SegurosLex and Amunategui y Cia.

The other two reported merger deals—one between expansionist Norton Rose and Fulbright & Jaworski, the other between U.K. midmarket firms Field Fisher Waterhouse and LG—remain works in progress.

That Norton Rose and Fulbright are in talks is no surprise. Norton Rose has been vocal in its desire to achieve another transatlantic tie-up to follow its moves in Australia, Canada and South Africa, and CEO Peter Martyr told me last January that his firm was “in a good position to move.” In the profile feature I wrote about the firm for The American Lawyer ‘s March 2011 feature, I said that the “smart money” was on a combination with Fulbright.

The two firms have maintained a close working relationship for years, and—as we reported last year—even held tentative merger talks in 2008, despite Martyr’s continued assertions to the contrary. Both firms are strong in energy, while the U.S. firm also has an underrated health care practice that would be a good fit with Norton Rose’s growing life sciences offering. The combined entity would benefit from Fulbright’s huge dispute resolution practice and Norton Rose’s infrastructure and financial services expertise. Fulbright is comfortably the more profitable business, but Norton Rose’s predilection toward structuring its international tie-ups under a Swiss verein would neatly circumvent the issue.

FFW and LG’s potential union, on the other hand, came somewhat out of left field. It signals an increasing appetite for mergers among midmarket firms.

Most mergers by U.K. law firms have been driven either by geographic expansion, such as the glut of recent moves into Australia by Norton Rose, Ashurst, and Linklaters; or by consolidation within a sector, such as the combination of insurance rivals Clyde & Co and Barlow, Lyde & Gilbert in the largest-ever U.K. law firm merger. (Clyde is another firm that has merged in Canada, acquiring local insurance boutique Nicholl Paskell-Mede last September. It too now wants a transatlantic deal.) Pinsent Masons and Scottish “Big Four” firm McGrigors merged earlier this month, but marriages between two midmarket U.K. firms have generally been thin on the ground. Former Clifford Chance managing partner Tony Williams, now principal at Jomati, thinks there will be many more to come.

“Last year, most mergers were international developments—this year, the pendulum is swinging much more to the domestic,” Williams says. “It’s a tough market at the moment, and as is true in any industry, when in a relatively flat market you have to look at ways to protect and enhance your position. One way of doing that is with greater scale and depth, which leads many to look at mergers. Firms shouldn’t just follow the herd and a merger is certainly not a silver bullet, but firms need a clear and defensible position in the market, and size may be a part of that.”

Both FFW and LG declined requests for an interview, but FFW managing partner Matthew Lohn said in a statement that merger is now on the agenda for “the majority of midmarket firms,” adding that FFW has been in talks with “several firms, including LG.”

Both Lohn and his LG counterpart, Hugh Maule, who also confirmed the discussions in a prepared statement, listed the strengthening of core practice areas and international expansion as being the key drivers.

While it’s true that any tie-up would benefit from FFW’s bases in Brussels, Düsseldorf, Hamburg, Manchester, Munich, and Paris, and LG’s offices in Dubai, Monaco, and Moscow, the reality is that it would do little to address either firm’s lack of international critical mass. Fewer than 20 percent of the combined firm’s 426 attorneys would be based outside London.

What a merger would do, however, is add considerable scale: The new business would rank in the U.K. top 25, with more than 200 partners and revenues exceeding £150 million ($235 million).

(As an aside, uniting with FFW would also offer LG the ability to change its name without having to admit the failure of its unfortunate 2007 rebrand, when it went from “Lawrence Graham” to an acronymous moniker that just-so-happened to be exactly the same as that of a South Korean electronics giant. It is the only law firm I can think of whose name doesn’t come first in the list of search results when you Google it.)

For most U.K. firms without the hedge of a vast international network, the past 12 months have been challenging to say the least. Financial results for the last fiscal year, which for most firms ended on April 30, are starting to trickle in. Taylor Wessing recently announced a 12 percent rise in revenue to £103.2 million ($162 million), while media firm Olswang posted an impressive 17 percent increase to £108.1 million ($170 million).

But the first announcements of financial results are not always reliable indicators of performance across the market. Thanks to the continued worsening of the Eurozone crisis and a U.K. economy that former Baker & McKenzie chair and current International Monetary Fund chief Christine Lagarde says continues to look uncertain, most firms will do well to see revenue significantly outstrip inflation, let alone break double digits.

“The legal market is still hugely fragmented, but we’re now at a stage where we’re going to see a significant shift toward consolidation and more strategic thinking,” says Alan Hodgart, managing director of Huron Consulting Group.

It’s important to not get too carried away. Law firm mergers are notoriously tricky things to get right, and as such suffer a high failure rate. But with the weight of merger momentum continuing to build, and with U.K. law firms now able to corporatize and accept external equity investment, there’s a real sense that the legal landscape is irrevocably changing.

Williams predicts that, in the medium term, as much as 40 percent of the U.K. top 100 could merge. What has up until now been a steady trickle of law firm mergers is fast becoming a flood.